Difference Between Equity and Shares
The key difference between equity and shares is that equity is the sign of ownership in any business entity, implying that somebody has ownership rights in the year-marked entity. Equity is not allowed to trade freely in the market. In contrast, a share is a portion of the equity measured in terms of number, value, and percentage in that entity, and can be easily traded in the market through stock exchanges.
The corporate world is all about owning the equity and the quantum of the shares directly or indirectly. The holding of equity determines the ownership and managerial control of the shareholder.
What is Equity?
Equity means the ownership stake in the company. In layman’s terms, it means ownership capital or net worthNet WorthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus.read more after repayment of all the debts. Equity investments are generally bought with the expectation of enjoying the price appreciation and grasping the opportunity to enjoy the increase in value. It provides the cushion of a benefit of ownership and its utility in day-to-day life.
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What is Shares?
Shares are the unit of the company’s capital or other entity. One can get ownership of the company by its shares. Therefore, shares are pieces of money freely tradeable in the stock exchange market. Moreover, the holding of shares determines the proportion of equity held by any individual directly or indirectly, allowing investors to keep the investment in any entity for the long term and the short term. Thus, share contracts are easily tradable and can get squared off in the stock exchange.
Let us take an example: –
- Mr. A buys a house worth $1 million by taking a bank loan of $800,000. In the said transaction, Mr. A has equity of $200,000 in the home, i.e., 20%.
- In XYZ Ltd, Mr. A buys 20% of the shares at market value. By purchasing these, Mr. A holds a 20% ownership stake in the entity.
- Mr. Y buys shares of Reliance Ltd. from the stock exchange. Here, shares are freely purchased from the market either to benefit from short-term price movement or to enjoy the appreciation of the value in the investment.
Equity vs. Shares Infographics
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Key Differences Between Equity and Shares
- Equity is the ownership stake in the entity or other valuable business component, while shares are the measurement of the ownership proportion of the individual in that business component.
- Equity will be available in all the business structures, including proprietorship or partnership or corporate business structure, while shares will be available only in the corporate systems.
- Equity is generally not freely tradable in the market as it directly affects the holding of the business entity. At the same time, shares are easily tradable through the recognized stock exchange.
- Equity includes shares, stocks, and other ownership capital, while the company shares have only equity share capital and preference share capital.
- Equity investments are generally riskier as the person holds the ownership interest in the entity, which will keep them open to all the risks faced by the entity. Generally, they are unlimitedly liable for their own interest. In contrast, share investment is comparatively less risky as they are only liable up to the subscribed capital in the entity. Hence, they have liability only up to the face value of the investment.
- Generally, equity investments are for the long term, while share investments are for the short term.
- The primary aim of equity investors is to profit from investments and appreciate their value, while share investors intend to enjoy short-term price movement.
- Equity is a broader term as compared to shares.
- Equity instrument holders do not always have the right to receive dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more, while shareholders are always entitled to dividends.
Comparative Table
| Basis | Equity | Shares |
|---|---|---|
| Tradability | Equity is the ownership stake that cannot be easily tradable in the market. | The shares are easily tradable at the stock exchange. |
| Investment in business type | Equity is generally found in all business forms, like proprietorship, partnership, or corporations. | Shares are generally seen in the companies only. |
| Dividend | If it has a share component, they are entitled to the dividend rights only. | Shares are always entitled to have dividend rights. |
| Includes | It includes shares, stocks, and all tangible assetsTangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment.read more, excluding debt and fictitious assets. | They include equity shares and preference shares only. |
| Risk | Equity is comparatively riskier as it is attributable to the entity’s ownership, so equity holders are directly facing the complexities faced by the entity. | Shares are comparatively less risky as the investors are liable for the capital owned and subscribed. |
| Broader term | It is a much more general term compared to share. | It is a comparatively narrow term. |
| Example | The person invests $100,000 in business, now if in that business no debt is there, that person is termed as holding 100%. | The person buys 1000 shares of Reliance, where he will be considered as shareholder proportion to 1000 shares in the company. |
| Intention | The investor’s primary intention is to profit by investing an amount for the long term. | The investor’s primary intention is to enjoy short-term price movement. |
| Subset | All equity is not called shares. | All shares are equity. |
Conclusion
In general, people do use equity and shares interchangeably. But fundamentally, there is a difference between both the terms.
Equity investments are the primary investments that help the entity raising money and give investors appreciation in their investment values. In contrast, share investments are made by the trader in the stock market. Their main aim is to speculate and to earn short-term price gain. Equity components involve the shares, stocks, reserves, and own funds. Hence, equity is a much broader term while shares are part of equity, and hence it is the part of the same.
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